Rebalancing is the process of restoring your portfolio to your target allocation. Picking the proper allocation and sticking to it is another discussion.
In a standard market cycle most investment line-ups will naturally “tilt” each month/quarter. That’s because some of your investments will do well while others won’t. (That is the whole point of diversifying your portfolio.) The investments that have performed well will take up more of your portfolio; those that haven’t done as well will take up less of your portfolio. Don’t be surprised when this happens, it’s healthy.
Reality: No one investment sector stays in favor forever. In the mid-1990s, for example, all investors cared about were financials stocks. Then from the late-1990s until March 2000, technology stocks were hot; you were crazy not to own them. After that, the popular investments were REITs.
The image below gives a very brief look into the impact of rebalancing an investment account given a set market performance.
And that’s the whole point of rebalancing: No one knows what asset class, or sector is going to rule the investment world next, or how rapidly things might change. Rebalancing helps you capitalize on diversification. Trimming back on a winner allows you to buy a straggler and protect your gains. If you are rebalancing it is the very definition of buying low and selling high. The best part is you are doing this unemotionally. Our client’s accounts rebalance quarterly, so whether they love a stock or fund – if rebalancing calls for it to be sold/bought, it is. This helps to ensure proper investment philosophy wins the day, and not your love for a fund, or “your gut feeling.”
Determine where your investments are out of whack.
Start by reviewing how your cash and bonds have moved relative to your stock stake. Most commonly, your positions in these areas will shrink compared to stocks because, historically, stocks as a group outperform cash and bonds. Look to see if your exposure to fixed income is less or greater than your allocation calls for. For example, if you have decided on an 80/20 portfolio, with time, you will end up with something different like an 85/15 or a 75/25. You will need to rebalance your account to get “the weight” back to an 80/20.
Be a tax strategist. Staying true to your portfolio’s volatility isn’t satisfying if your rebalancing approach means you also wind up with poor after-tax returns. Be cognizant of this in an after-tax account. You do not need to monitor this in a retirement account such as an IRA or ROTH IRA, just an after-tax account.
Meet with Your Financial Advisor The first step is to create a working relationship with your financial advisor. At TrueNorth Wealth, we pride ourselves on working very closely with our clients to ensure their investment strategies are always aligned with their risk tolerance and end goals. We continuously check on investment accounts for our clients to ensure optimum performance levels.
For more specific questions on rebalancing your investment account and/or questions on your individual financial needs and, please contact your financial advisor to set up a portfolio review. Please call TrueNorth Wealth: (801) 980-3507 or email email@example.com. We look forward to assisting you on your financial journey.
TrueNorth Retirement Services is a financial and wealth management firm specializing in personalized financial guidance to local individuals and businesses. For a free financial consultation, please call: (801) 274-1820 or email firstname.lastname@example.org.